Question 1

When comparing debentures and unsecured notes,it can be said that:
A)they are identical securities.
B)a debenture holder is an unsecured creditor whereas an unsecured note holder is a secured creditor.
C)both are an example of unsecured debt.
D)a debenture holder is a secured creditor whereas an unsecured note holder is an unsecured creditor.

Accepted Answer

A debenture is typically a type of debt instrument that is secured by the issuer's general creditworthiness and reputation, making the debenture holder a secured creditor. In contrast, an unsecured note is not backed by any collateral, making the note holder an unsecured creditor.

Question 2

The number of ordinary shares received by the holder of each converting preference share is known as the:
A)converting ratio.
B)share ratio.
C)conversion ratio.
D)perpetual ratio.

Accepted Answer

The number of ordinary shares received by the holder of each converting preference share is known as the conversion ratio. A converting ratio and perpetual ratio are not commonly used terms in this context, and a share ratio is a less specific term that could refer to various things such as the proportion of shares held by different investors.

Question 3

Bonds issued outside the borrower's country and denominated in the currency of the country in which it is issued are known as:
A)foreign bonds.
B)domestic bonds.
C)eurobonds.
D)Australian bonds.

Accepted Answer

Foreign bonds are issued in a domestic market by a foreign borrower, denominated in the domestic currency of the market in which they are issued.

Question 4

Which of the following statements best describes a swap?
A)It is a contract in which two parties agree to exchange financial securities.
B)It is a contract in which two parties agree to exchange a series of future cash flows over a specified period of time.
C)It is a contract in which two parties agree to exchange assets.
D)Swap is an acronym for 'savings with annual payments'.

Accepted Answer

A swap is a contract in which two parties agree to exchange a series of future cash flows over a specified period of time. These cash flows can be based on different types of assets such as currencies, interest rates, commodities or securities. Unlike a regular exchange of assets, a swap allows both parties to benefit from the difference in the cash flows they receive, without actually owning the underlying assets.

Question 5

It is expected that the interest rates on debentures will be greater than on commercial bills because:
A)a bank may not endorse commercial bills.
B)of the liquidity preference of investors.
C)debentures are typically unsecured.
D)debentures are readily marketable.

Accepted Answer

The liquidity preference of investors means that investors prefer to hold more liquid investments, such as commercial bills that can be easily bought and sold, rather than longer-term investments like debentures. To compensate for the greater risk of illiquidity, debentures typically offer a higher interest rate than commercial bills. The other choices (A, C, D) are not as relevant to the difference in interest rates between debentures and commercial bills.

Question 6

Subordinated debt-holders will demand higher compensation than unsubordinated debt-holders because:
A)unsubordinated debt is riskier.
B)subordinated debt ranks ahead of unsubordinated debt.
C)unsubordinated debt ranks ahead of subordinated debt.
D)the interest rate on subordinated debt tends to be fixed rather than variable.

Accepted Answer

Subordinated debt is lower in priority for repayment than unsubordinated debt in the event of a borrower's default, making it riskier. Therefore, holders of subordinated debt demand higher compensation for the increased risk.

Question 7

A characteristic of redeemable preference shares is that:
A)the company is required to pay any accumulated preference dividends before a distribution can be made to ordinary shareholders.
B)they may be re-purchased by the company out of profits or the proceeds of a new share issue.
C)they may be converted into ordinary shares.
D)such shareholders may be entitled to a return in excess of the stated preference dividend rate.

Accepted Answer

Redeemable preference shares can be repurchased by the company, typically out of profits or from the proceeds of a new share issue, as they have a set redemption date or condition.

Question 8

If a company is in financial distress,the existence of debentures and the associated trust deed can compound difficulties.Which of the following statements is unlikely to be a difficulty for a company in financial distress?
A)Publicity resulting from any actions taken by the trustee.
B)Borrowing restrictions.
C)Interest payments on the debentures.
D)None of the given options.

Accepted Answer

The existence of debentures and the associated trust deed primarily introduces challenges such as potential borrowing restrictions and obligations for interest payments, but none of the options listed inherently eases difficulties for a financially distressed company.

Question 9

Which type of debt takes the form of loans arranged privately between two parties where the lender is usually a bank or other financial institution?
A)Covenant.
B)Debenture.
C)Marketable debt.
D)Non-marketable debt.

Accepted Answer

Non-marketable debt typically involves loans arranged privately between a borrower and a financial institution, where the debt cannot be easily sold or transferred to another party.

Question 10

Which type of debt ranks below other debt in the event that a company is wound up?
A)Subordinated debt.
B)Unsubordinated debt.
C)Marketable debt.
D)Non-marketable debt.

Accepted Answer

Subordinated debt ranks below other debt in the event that a company is wound up. This means that other debts, such as unsubordinated debt, marketable debt, and non-marketable debt, have priority in terms of payment in case of liquidation.

Question 11

An advantage of interest rate swaps is the ability to:
A)swap a fixed loan to a flexible loan.
B)borrow flexible-rate funds,which otherwise would not be available.
C)borrow overseas at a fixed exchange rate.
D)borrow fixed-rate funds,which otherwise would not be available.

Accepted Answer

Interest rate swaps allow borrowers to access funds at a fixed rate, which may not be available in the market. This can be advantageous if the borrower seeks a fixed payment obligation or is looking for protection against interest rate volatility. Option A is incorrect, as interest rate swaps do not allow for a swap from a fixed to flexible loan, but rather allow for swapping from fixed to floating (or vice versa). Option B is incorrect, as interest rate swaps do not provide access to funds that are otherwise unavailable. Option C is incorrect, as interest rate swaps do not involve exchange rate considerations.

Question 12

A company that issues debentures is required to draw up:
A)the listing rules.
B)a trust deed.
C)a covenant.
D)all of the given options.

Accepted Answer

A trust deed is a legal document that outlines the terms and conditions of the debentures, including the rights and obligations of the issuer and the debenture holders. The issuer must draw up a trust deed to ensure that both parties are aware of their responsibilities and to protect the interests of the debenture holders. The other options (listing rules and covenants) may also be relevant in the issuance of debentures, but they are not required to be drawn up by the issuer.

Question 13

Co-op Ltd issues converting preference shares with a face value of $15,which convert to ordinary shares on 30 June.The conversion ratio is determined by dividing the face value of the preference share by an amount equal to the price of Co-op ordinary shares on 30 June,less 10 per cent.If the market value of ordinary shares on the conversion is $5.35,at what value will each preference share convert into ordinary shares?
A)$15.00
B)$16.67
C)$5.35
D)$13.50

Accepted Answer

To determine the conversion value, we need to use the following formula:

Conversion ratio = Face value of preference share / (Price of ordinary share on 30 June - 10%)

Given that the face value of the preference share is $15, and the market value of ordinary shares on conversion is $5.35, we can calculate the conversion ratio as follows:

Conversion ratio = $15 / ($5.35 - 10%) = $15 / $4.815 = 3.114

This means that each preference share will convert into 3.114 ordinary shares. To determine the value of each converted share, we divide the market value of ordinary shares on conversion by the conversion ratio:

Value of each converted share = $5.35 / 3.114 = $1.72 (rounded to two decimal places)

Therefore, the correct answer is B) $16.67, which is the total value of the three ordinary shares received per preference share ($1.72 x 3 = $5.16), plus the face value of the preference share ($15).

Question 14

Converting preference shares offer a guaranteed price prior to a specified conversion date:
A)so that the holder is effectively protected against a fall in the price of the ordinary shares prior to conversion.
B)so that the holder has the opportunity to profit from a fall in the price of the ordinary shares prior to conversion.
C)so that the holder has the opportunity to profit from an increase in the price of the ordinary shares prior to conversion.
D)so that the holder has the opportunity to profit from an increase in the price of the ordinary shares after the conversion.

Accepted Answer

Converting preference shares offer a guaranteed price prior to a specified conversion date to protect the holder against a fall in the price of the ordinary shares prior to conversion, ensuring that they receive a set amount regardless of any price fluctuations before the conversion date.

Question 15

Which type of loan involves regular repayments which include principal and interest?
A)Bond.
B)Commercial Bill.
C)Principle-and-Interest loan.
D)Interest-Only Loan.

Accepted Answer

Principle-and-Interest loan involves regular repayments which include both principal and interest. This type of loan is commonly used for mortgages and personal loans, where the borrower makes fixed payments over a set period of time until the loan is fully repaid. Bond and Commercial Bill are types of debt securities, whereas Interest-Only Loan only requires repayment of the interest amount and not the principal amount.

Question 16

Most marketable long-term debt securities have a fixed interest rate known as the:
A)risk-free rate.
B)coupon rate.
C)yield to maturity.
D)default rate.

Accepted Answer

The fixed interest rate on long-term debt securities is known as the coupon rate. The risk-free rate is the theoretical rate of return on an investment with zero risk, the yield to maturity takes into account the current market price and the coupon rate, and the default rate is the rate at which borrowers default on their loans.

Question 17

Interest rates are normally higher on unsecured notes than on debentures because:
A)debenture holders have a prior claim over company assets.
B)debentures are a riskier form of security.
C)unsecured notes are normally secured by a floating charge over assets.
D)unsecured notes are normally secured by a fixed charge over an asset.

Accepted Answer

Debenture holders have a prior claim over company assets, making their investment less risky than unsecured notes. Therefore, investors require a higher rate of return for investing in unsecured notes.

Question 18

An advantage of using debt is that:
A)debt-holders have no control over the company's operations.
B)debt-holders usually exert no control over the company's operations.
C)interest payments are fixed.
D)a company may borrow without the security of an asset.

Accepted Answer

Debt-holders usually do not have control over the company's operations, which allows the company to maintain its autonomy. Additionally, interest payments are typically fixed, which allows for easier budgeting and forecasting. While a company may be able to borrow without the security of an asset, this is not necessarily an advantage as it increases the risk for both the borrower and the lender.

Question 19

Chameleon Ltd has a fixed interest rate borrowing of $1 million at 10% p.a.for five years and wishes to swap to a floating rate loan.In the swap,Chameleon pays the fixed interest payment of $100 000 on the loan and the final balloon payment.It agrees to pay a financial intermediary a variable amount at the bank-accepted bill interest rate on the $1 million and the financial intermediary pays Chameleon a fixed rate of 10% p.a.What is the result of this swap by Chameleon?
A)Chameleon has effectively borrowed $1 million at the bank-accepted bill rate.
B)Chameleon has effectively borrowed $1 million at the fixed interest rate.
C)Chameleon has effectively borrowed $100 000 at the bank-accepted bill rate.
D)Chameleon has effectively borrowed $100 000 at the fixed interest rate.

Accepted Answer

By entering into the swap, Chameleon has effectively converted their fixed rate borrowing into a floating rate borrowing at the bank-accepted bill interest rate, which is the variable amount they agreed to pay the financial intermediary. Therefore, they have effectively borrowed $1 million at the bank-accepted bill rate.

Question 20

The main difference between corporate bonds and debentures is that:
A)debentures are typically unsecured.
B)the trust deed for corporate bonds is normally less restrictive than that for debentures.
C)debentures are placed privately with institutional investors.
D)corporate bonds are normally for a longer term.

Accepted Answer

The answer of The main difference between corporate bonds and...

Quiz 10: Sources of Finance: Debt

When comparing debentures and unsecured notes,it can be said that:

The number of ordinary shares received by the holder of each converting preference share is known as the:

Bonds issued outside the borrower's country and denominated in the currency of the country in which it is issued are known as:

Which of the following statements best describes a swap?

It is expected that the interest rates on debentures will be greater than on commercial bills because:

Subordinated debt-holders will demand higher compensation than unsubordinated debt-holders because:

A characteristic of redeemable preference shares is that:

If a company is in financial distress,the existence of debentures and the associated trust deed can compound difficulties.Which of the following statements is unlikely to be a difficulty for a company in financial distress?

Which type of debt takes the form of loans arranged privately between two parties where the lender is usually a bank or other financial institution?

Which type of debt ranks below other debt in the event that a company is wound up?

An advantage of interest rate swaps is the ability to:

A company that issues debentures is required to draw up:

Converting preference shares offer a guaranteed price prior to a specified conversion date:

Which type of loan involves regular repayments which include principal and interest?

Most marketable long-term debt securities have a fixed interest rate known as the:

Interest rates are normally higher on unsecured notes than on debentures because:

An advantage of using debt is that:

The main difference between corporate bonds and debentures is that: